Chinese move queers pharma pitch

Last Updated: Tue, Jul 29, 2008 04:49 hrs

India Inc has for long been at the receiving end from China, largely due to the low-cost products the nation is able to push across the border. This time, it is the turn of pharma to suffer headwinds from that direction.

Only, much against the trend, it isn't China's ability to make low-cost products that is giving local manufacturers the sleepless nights as much as the fact that it has cut down on production.

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The 2008 Olympics host has clamped strict environmental norms on units manufacturing active pharmaceutical ingredients (APIs) and intermediates – raw materials that go into manufacturing drugs.

Tapan Ray, director general of the Organisation of Pharmaceutical Producers of India (OPPI), says many pharma players have been sourcing APIs from China where the prices have always been low. However, with the Chinese government stopping exports of APIs from units not adhering to pollution control norms, several units have shut shop and the remaining producers have hiked prices.

A pharma analyst from broking firm First Global said, "Though a figure cannot be put to the number of units that have shut shop in China, considering it is a very closed setup, it has lead to prices of raw materials spiralling up in India, as we rely on China for 80% of API and intermediates." And this isn't all.

BN Singh, president of the Indian Drug Manufacturers Association (IDMA), says the revaluation of the Chinese yuan downwards against the US dollar in recent months has also lead to an increase in the cost of electricity and other solutions needed for manufacturing the raw materials.

For most pharma companies in India, raw material costs as a percentage of total costs are anywhere between 40% and 60%. According to First Global, players like Dr Reddy's, Piramal Healthcare and Lupin import as much as 37%, 24%, and 55% of their total raw material, respectively.

Swati A Piramal, director, Piramal Healthcare says, "There has been a 50% rise in prices of raw materials. We are facing a severe crunch of vitamin C, vitamin A and antibiotics, etc."

The prices of APIs such as erythromycin, which is used in the treatment of throat infections, have gone up by as much as 20-50% in the last few months. "The price of the intermediate for erythromycin, which is majorly imported from China, has risen from $45 per kg to $70 per kg," says IDMA's Singh.

The price of paracetamol, which was around Rs 135 per kg in January-March this year, has almost touched Rs 330 now. "And even at this price, the material is not easily available," says OPPI's Ray.

And yet, local companies can hardly pass on the incremental costs to customers. Under government regulations, prices of non-price-controlled drugs can be raised by only up to 10%.

"When prices of raw materials are rising by 40-50%, how can you stop the prices of end products from being raised beyond 10%?" asks Singh.

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Analysts fear that if the producers are stopped from passing on the costs for much longer, as much as 20% of the drugs could go off the shelves.

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